Select Committee on Transport, Local Government and the Regions Eleventh Report

ELEVENTH REPORT

The Transport, Local Government and the Regions Committee
has agreed to the following Report:

AIR TRANSPORT INDUSTRY

I. Introduction

1. Global demand for air travel collapsed
immediately after the catastrophic events of 11 September 2001.
In the month after the terrorist attacks, air traffic on routes
between the United States and Europe fell by 35 per cent, and
within Europe by 10 per cent.[1]
In the United Kingdom, British Airways traffic in October fell
by 24.7 per cent overall on the previous year, with a 36.2 per
cent fall in premium traffic, and load factors fell by 8.1 per
centage points to 63.1 per cent.[2]
Premium traffic was hardest hit, partly as a result of the decline
in economic confidence and partly due to companies imposing travel
bans, with trans-Atlantic and Japanese routes worst affected.[3]
In response, many airlines withdrew routes, cut back services
and shed staff. For example, shortly after 11 September, British
Airways announced an additional 5,200 job losses, and bmi British
Midland announced 600 job losses.[4]
Several airlines with pre-existing financial difficulties were
forced into part or full closure.[5]
In December 2001 and January 2002, we held two evidence sessions
into the responses of the air transport industry and of governments
to the attacks in the United States and the longer-term prospects
for aviation in this country. We received more than thirty written
memoranda. We are grateful to all those who submitted written
and oral evidence and to our specialist advisor, Mr Laurie Price.

2. Since concluding evidence for this Inquiry,
we have undertaken a separate short inquiry into the finances
of National Air Traffic Services. We shall consider some of the
wider issues relating to air transport in our forthcoming inquiry
into the Government's Aviation White Paper, which the Minister,
Mr David Jamieson confirmed to us in evidence in January would
be published in the autumn.[6]
We expect to see firm proposals for the future of aviation
in the forthcoming Aviation White Paper, which is due to be published
in the autumn of 2002. We are concerned that the timetable for
the White Paper has already slipped.

4. Despite the size and scale of the industry,
airlines have traditionally survived on slim profit margins. Moreover,
the industry displays cycles of growth and contraction. Capacity
follows demand, which creates periods of overcapacity when demand
falls.[11] Industry analysts
had forecasted another cyclical downturn was due at the start
of 2001.[12] The Civil
Aviation Authority (CAA) described the industry as having been
"on the cusp of recession" before the attacks on 11
September. The attacks in the United States accentuated and accelerated
the industry's difficulties of overcapacity, high costs, a changing
demand structure and intense competition.[13]

5. The industry's financial resilience depended
on an "appropriate cost base for the traffic stream".[14]
Before 11 September, there was pressure on both costs and traffic
levels. Labour and aviation fuel costs had increased, and excess
capacity had built up over a period of time.[15]
Mr Chris Tarry, an aviation investment analyst, considered the
overcapacity in the industry before the terrorist attacks to be
as much as 30 per cent, which led to severe financial pressures
for airlines that had failed to adjust to the "incompatibility
of the pricing strategy with the cost of operations".[16]

6. Scheduled airlines have had to respond to
changes in traveller behaviour and the dramatic increase in competition
from no-frills airlines on short-haul routes. Increasing numbers
of business travellers have moved from business to economy class,
or switched to low-cost carriers in order to achieve best value
for money, adding to the pressure on those airlines that make
the majority of their profit from premium class passengers.[17]
The CAA noted that new entrants to the market, which are mainly
in the no-frills sector, put considerable pressure on airlines
with poor products or high cost structures.[18]
The industry had responded to the less favourable operating environment
by seeking opportunities to consolidate and reducing costs and
the number of unprofitable routes.[19]

7. In addition to pressures within the industry,
aviation has been susceptible to the general global economic slowdown.[20]
The onset, or at least the perception, of an economic slowdown
was evident in underlying demand, particularly in the business
traveller and trans-Atlantic leisure sectors.[21]
Before the attacks on 11 September, the International Air Transport
Association forecast a $2 billion to $3 billion loss on international
services due to the drop in demand for business traffic and excess
capacity. In the United Kingdom, the foot and mouth outbreak and
the relative strength of sterling also had an impact on the number
of air travellers.

8.The air transport industry is cyclical and susceptible
to downturns in the economy. Since 2000, there have been signs
of a general slowdown in the global economy that led to fewer
passengers and less money for investment in the industry. Many
sectors of the United Kingdom's air transport industry were, therefore,
already experiencing a significant reduction in business even
before the terrorist attacks in the United States. There has been
a marked contrast in reaction by the various industry sectors
in responding to that reduction in business. The low-cost sector
appears to have been the most successful in generating traffic
and improving profitability by exploiting new markets and, in
some cases, use of secondary airports while restraining costs.